A series of measures to prevent speculation issued earlier by the Bank of Thailand (BOT) has never covered B/Es. From September 6, the central bank allowed commercial banks to issue the financial instruments to retail investors.

An existing measure only mentions that banks can borrow from non-residents (NRs) without underlying transactions, but the maturity must be more than three months. If they borrow from NRs for less than three months, the borrowings are required to be transactions with underlying business.

Suchart Sakkankosone, the director of BOT's financial-markets operations group, said the central bank was asking financial institutions not to issue and sell B/Es in baht for all maturities to NRs because it did not want the supply of baht to be in speculators' hands.

Commercial banks had issued B/Es worth Bt60 billion as of September, but the central bank cannot determine who the holders are, he said.

"The central bank does not know when NRs buy B/Es in the secondary market, so we have to be more cautious on this," said BOT governor-designate Tarisa Watanagase.

After reaping capital gains from the Thai bourse or bonds, NRs can park their money in B/Es and wait for an appropriate time when the baht is stronger to take dollars out of the country.

With its short-term maturity, holding B/Es is a more attractive way to park money than other financial instruments.

The measure has been taken to reduce the channels through which NRs can speculate on the baht as they want to make profits in both the capital market and the foreign-exchange market.

Currently, each NR can leave the money in non-resident baht accounts at not more than Bt300 million outstanding for all accounts at the end of the day. This rule, issued on October 24, 2003, reduces the chance of speculation.

In addition to the deposit accounts, NRs can also park their money by buying government bonds before leaving, but such investments can create more risk for them if bond prices fall.

Tarisa said foreign investors had bought money in stock and bond markets worth around Bt113 billion in the first 10 months of this year, compared with Bt39 billion for the whole of last year.

The BOT's measure is likely to receive cooperation from commercial banks because it gives them a stick to punish speculators. But problems can be triggered by the remaining loophole as the latest measure covers only banks, while institutional investors are still able to hold and sell B/Es to NRs. This gives NRs a means to park money and speculate on the baht.

But Suchart dismisses such concerns, saying the short-term maturity of B/Es will prevent them from changing hands often. He said the BOT would know if NRs were the final holders of B/Es. "Anyway, we have to monitor closely whether B/Es are in NR hands, and we ask banks to urge institutional investors not to sell B/Es to NRs."

The expected fluctuation of capital movement and global financial uncertainty next year will indicate if the measures are enough to stabilise the baht.

Anoma Srisukkasem

The Nation